Using the IS-LM and AS-AD to analyze economic shock of the pandemic in March of 2020....

 

Transcribed Image Text:

Using the IS-LM and AS-AD to analyze economic shock of the pandemic in March of 2020. a. During March 2020, many states went into a lockdown and most people stopped shopping for goods and services out of fear and uncertainty. Using the 15-LM framework, graph the effect of this shock on the IS curve. What's the impact on output and the interest rate? b. At the same time, people concerned about the health of financial institutions, withdrew cash and held onto their funds instead of depositing them at banks. Using the 15- LM framework, graph the effect of this shock on the LM curve. What's the impact on output and the interest rate? c. Assume that we observed the interest rate fall. Which shock was more significant (larger), the one in (a) or (b)? d. Graph the effects of the shocks in (a) and (b) on Aggregate Demand (Note that both the IS and LM shifts will have the same effect on AD). e. The government passed a fiscal stimulus package which increased government expenditures and reduced taxes. At the same time, the Fed increased money supply. Explain the effects of these interventions in the IS-LM framework and on Aggregate Demand. (No need to graph, simply state which policy shifts which curve (15 or LM) in what direction and what is the ultimate effect on AD7) f. Using Mundell-Fleming model, what is the effect on the exchange rate of the shocks in a and b? Does the model predict that the dollar appreciates or depreciates? (in other words, if IS shifts left and LM shifts left in Mundell-Fleming model of small open economy, what is the effect on exchange rate?) Using the IS-LM and AS-AD to analyze economic shock of the pandemic in March of 2020. a. During March 2020, many states went into a lockdown and most people stopped shopping for goods and services out of fear and uncertainty. Using the 15-LM framework, graph the effect of this shock on the IS curve. What's the impact on output and the interest rate? b. At the same time, people concerned about the health of financial institutions, withdrew cash and held onto their funds instead of depositing them at banks. Using the 15- LM framework, graph the effect of this shock on the LM curve. What's the impact on output and the interest rate? c. Assume that we observed the interest rate fall. Which shock was more significant (larger), the one in (a) or (b)? d. Graph the effects of the shocks in (a) and (b) on Aggregate Demand (Note that both the IS and LM shifts will have the same effect on AD). e. The government passed a fiscal stimulus package which increased government expenditures and reduced taxes. At the same time, the Fed increased money supply. Explain the effects of these interventions in the IS-LM framework and on Aggregate Demand. (No need to graph, simply state which policy shifts which curve (15 or LM) in what direction and what is the ultimate effect on AD7) f. Using Mundell-Fleming model, what is the effect on the exchange rate of the shocks in a and b? Does the model predict that the dollar appreciates or depreciates? (in other words, if IS shifts left and LM shifts left in Mundell-Fleming model of small open economy, what is the effect on exchange rate?)